Sovereign Debt Restructurings: Panacea or Pangloss?
The most widely proposed LDC debt plans are flawed by their failure to recognize the fundamental differences between corporate and sovereign debt. Consequently, many plans intended to help highly-indebted countries mainly aid their foreign creditors. This paper emphasizes the crucial distinction between marginal and average sovereign debt. This distinction provides the cornerstone for an understanding of debt buybacks, debt-equity swaps, and debt-for-debt swaps involving new classes of seniority. Highly indebted countries would benefit more from direct transfers than from the same resources spent on any of these financial engineering schemes.
Published: "The Buyback Boondoggle" Brookings Papers on Economic Activity, No. 2, pp. 675-698, (1988).